1. Determine the proper tax year for gross income inclusion in each of the following cases. a. An au

Determine the proper tax year for gross income inclusion in
each of the following cases.
An automobile dealer has several new cars in inventory, but
often does not have the right combination of body style, color, and
accessories. In some cases the dealer makes an offer to sell a car at a certain
price, accepts a deposit, and then orders the car from the manufacturer. When
the car is received from the manufacturer, the sale is closed, and the dealer
receives the balance of the sales price. At the end of the current year, the
dealer has deposits totaling $8,200 for cars that have not been received from
the manufacturer. When is the $8,200 subject to tax?

Purple Corporation, an exterminating company, is a calendar
year taxpayer. It contracts to provide service to homeowners once a month under
a one-, two-, or three-year contract. On April 1 of the current year, the
company sold a customer a one-year contract for $120. How much of the $120 is
taxable in the current year if the company is an accrual basis taxpayer. If the
$120 is payment on a two-year contract, how much is taxed in the year the contract
is sold and in the following year? If the $120 is payment on a three-year
contract, how much is taxed in the year the contract is sold and in the
following year?

Pink, Inc., an accrual basis taxpayer, owns an amusement
park whose fiscal year ends September 30. To increase business during the fall
and winter months, Pink sold passes that would allow the holder to ride “freeâ€
during the months of October through March. During the month of September,
$6,000 was collected from the sale of passes for the upcoming fall and winter.
When will the $6,000 be taxable to Pink?

The taxpayer is in the office equipment rental business and
uses the accrual basis of accounting. In December he collected $5,000 in rents
for the following January. When is the $5,000 taxable?

José, a cash method taxpayer, is a partner in J&T
Accounting Services, a calendar year partnership. Under the partnership
agreement, José is to receive 20% of the partnership’s profits or losses. Each
partner is allowed to withdraw $10,000 each month for his or her living
expenses. José withdrew $120,000 during the year as his monthly draw in 2013.
However, in December the partnership was short on cash and José was required to
invest an additional $10,000 in the partnership. In March 2013, José received $40,000
as his share of distributed 2012 profits. The partnership earnings before
partners’ withdrawals for 2013 totaled $1 million. Compute José’s gross income
from the partnership for 2013.

On January 1, 2014, Faye gave Todd, her son, a 36-month
certificate of deposit she purchased December 31, 2012, for $8,638. Faye gave
Todd 1,000 shares of ABC, Inc., on December 2, 2014. The certificate had a
maturity value of $10,000 and the yield to maturity was 5%. On November 30,
2014, ABC, Inc., had declared a dividend of $1.00 payable to stockholders of
record on December 5th. How much interest and dividends should Todd include in
his gross income for 2014?


Ted and Alice were in the process of negotiating a divorce
agreement. They own bonds with a basis of $800,000 and a fair market value of
$800,000. They also own common stock with a basis of $600,000 and a fair market
value of $800,000. Alice is trying to decide whether to bargain to receive the
bonds or the stock. She has no plans for selling the bonds or stock, whichever
she receives.

Which would you advise Alice to receive?

b. From Ted’s perspective, are the assets of
equal value?

Margaret made a $90,000 interest-free loan to her son, Adam,
who used the money to retire a mortgage on his personal residence and to buy a
certificate of deposit. Adam’s only income for the year is his salary of
$35,000 and $1,400 interest income on the certificate of deposit. The relevant
Federal interest rate is 8% compounded semiannually. The loan is outstanding
for the entire year.

Based on the above information, what is the effect of the
loan on Margaret’s gross income for the year?

The facts are the same as above, except you discovered that
Margaret had made an additional loan of $15,000 to Adam in the previous year.
Adam used the funds to pay his child’s private school tuition. What are the effects
of the loans on Margaret’s gross income?

Arnold was employed during the first six months of the year
and earned a $90,000 salary. During the next 6 months, he collected $7,200 of
unemployment compensation, borrowed $6,000 (using his personal residence as
collateral), and withdrew $1,000 from his savings account (including $60
interest). When he left his former employer, he withdrew his retirement
benefits (a qualified annuity) in a lump-sum of $50,000. He made no
contributions to the plan. Arnold’s parents loaned him $10,000 (interest­free)
on July 1 of the current year, when the Federal rate was 3%. Arnold did not
repay the loan during the year and used the money for living expenses.
Calculate Arnold’s adjusted gross income for the year.

How does the taxation of Social Security benefits differ
from the taxation of an annuity purchased by the taxpayer?


Sarah, a widow, is retired and receives $20,000 interest
income and dividends and $10,000 in Social Security benefits. Sarah is
considering selling a stock at an $8,000 gain. What will be the increase in
Sarah’s gross income as a result of the sale of the stock?

Roy is considering purchasing land for $10,000. He expects
the land to appreciate in value 8% each year (compounded) and he will sell it
at the end of 10 years. He also is considering purchasing a bond for $10,000.
The bond does not pay any annual interest, but will pay $21,589 at maturity in
10 years. The before-tax rate of return on the bond is 8%. Roy is in the 40%
(combined Federal and State) marginal tax bracket. Roy has other investments
that earn a 8% before-tax rate of return. Given that the compound interest
factor at 8% is 2.1589, and at 4.8% the factor is 1.5981, which alternative
should Roy choose?


In January 2014, Tammy purchased a bond due in 24 months.
The cost of the bond is $857 and its maturity value is $1,000. No interest is
paid each year, but the compound interest rate on the bond is 8%. Tammy also
purchased a Series EE United States Government bond for $558, with a maturity
value in 10 years of $1,000. This is the only Series EE bond she has ever
owned. The Series EE bond is sold to yield 6% interest. Tammy is 13 years old
and has no other source of income. She is claimed as a dependent by her
parents. Compute Tammy’s gross income from the bond and Series EE bond for

In some foreign countries, the tax law specifically
designates the types of income items that are includible in gross income. How
does this approach compare with the U.S. Internal Revenue Code (§ 61)? What is
a major advantage to the approach used in the U.S. tax law?


Melissa is a compulsive coupon clipper. She often brags
about the time she purchased a cart full of groceries for $5.00, when the cost
without coupons would have been $50. Discuss whether Melissa realizes gross
income from her coupon clipping.

Katherine is 60 years old and is bargaining with her
employer over deferred compensation. In exchange for reducing her current
year’s salary by $50,000, she can receive a lump­sum amount in 5 years, when
she will retire. If she receives the $50,000 in the current year, she will
invest in certificates of deposit that yield 5%. Katherine is in the 28%
marginal tax bracket in all relevant years. What is the minimum amount
Katherine should accept as a deferred pay option? [Hint: the compound interest
factor is 1.1934.]

Dick and Jane are divorced in 2013. At the time of the
divorce, Dick had a lawsuit pending. He had filed suit against a former
employer for overtime pay. As part of a divorce agreement, Dick agreed to pay
Jane one-half of the proceeds from the lawsuit. In 2014, Dick collected
$250,000 from the former employer and paid Jane $125,000. What are the tax
consequences for Dick receiving the $250,000 and then paying Jane the $125,000?


Rachel owns rental properties. When Rachel rents to a new
tenant, she usually requires the tenant to pay an amount in addition to the
first month’s rent. The additional amount serves as security for damages to the
property and the tenant’s failure to pay future rents. How should the payments
be characterized (e.g., on lease documents) to minimize Rachel’s current tax

Rachel, who is in the 35% marginal tax bracket, is
considering purchasing an annuity that will pay her $10,000 per year for the
remainder of her life. Her life expectancy is 15 years. The cost of the annuity
is $97,120, and the cost is calculated to yield her an expected 6% return on
her investment. As an alternative, Rachel could place the $97,120 in a savings
account yielding 6% and she could withdraw $10,000 each year for 15 years
(reducing the value of the account to zero at the end of 15 years). How might
the tax laws applicable to annuities affect Rachel’s decision?

In the case of a zero interest below-market loan by a
corporation to a shareholder-employee, what difference does it make to the
corporation and the shareholder whether the loan is characterized as a
corporation’s loan to its shareholder or a corporation’s loan to its employee?

Under the formula for taxing Social Security benefits, low
income taxpayers are not required to include any of the Social Security
benefits in gross income. But as income increases, 50% of the Social Security
benefits may be included in gross income. Further increases in income will
cause as much as 85% of the Social Security benefits being subject to tax. Does
this mean that the taxation of Social Security benefits is more or less
progressive than the taxation of other types of income?



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